Acct 224 CH 1 Words ? Function – 功能；函数；职责；运行
? Business enterprise – 工商企业；企业机构 ? Investors and creditors
? Critical resource allocation decisions – 关键资源配置决策 ? Convey – 传达；运输
? Explore – 探索；探测；探险
? FASB – Financial Accounting Standards Board 财务会计标准委员会 ? Conceptual framework – 概念框架
? Foundation – 基础；地基；基金会；创立 ? Disclosure – 披露；揭发
? Accrual accounting – 权责发生制 ? Accrual – 自然增长；自然增长额 ? Define- 定义，明确；规定
? Establishment- 确立；制定；公司；设施 ? Mechanism – 机制；原理；途径 ? Capital market – 资本市场 ? Sole proprietorship – 独资 ? Partnership – 合伙企业
? Corporations – 公司；法人；社团 ? Dominant – 占优势的；支配的 ? Medium – 方法；媒介；媒体
? NASDAQ – National association of securities dealers automated quotation 全国证券交易
商自动报价系统协会
? Security market – 证券市场
Security primary market 一级市场 Security secondary market 二级市场 Security exchange market 证券交易市场 Security-market indexes 证券市场指数
一级市场：新发行股票的市场，是企业进行股票发行，以企业、券商，和申购股票的机构或个人投资者为交易主体的市场。这个市场是直接由企业将股份抛进市场的途径，所以又可以称为批发市场。
二级市场：发行结束后在正规的交易所上市交易的市场。是机构或者个人投资者在证券交易所所进行的股票转让，以投资者
券商为主体对象的市场。我们在证券公司交易的股票是在交易所成交的，属于二级市场。简单来说，二级市场就是交易市场，只能不断将手中持有的股票转让，而美语权力将股票注销。
? Institution – 制度；建立；公共机构；习俗 ? Initial owner – 原始持有人 ? Estimate – 估计；估量；判断 ? Cash disbursements – 现金支出
? Play a vital societal role – 至关重要的社会角色
? ?
Learning objectives
? Describe the function and primary focus of financial accounting. (Page 4) ? Explain the difference between cash and accrual accounting. (Page 7)
? Define generally accepted accounting principles (GAAP) and discuss the historical
development of accounting standards. (Page 9)
? Explain why the establishment of accounting standards is characterized as a political
process. (Page 12)
? Explain the purpose of the FASB’S conceptual framework. (Page 20)
? Identify the objective of financial reporting, the qualitative characteristics of financial
reporting information, and the elements of financial statements. (Page 21) ? Describe the four basic assumptions underlying GAAP. (Page 28)
? Describe the four broad accounting principles that guide accounting practice. (Page 29) Financial reporting case CFO: What is two plus two?
Third candidate: What would you like to be? CFO: You’re hired. Chapter details PART A Financial accounting environment ? Investors and creditors use information to assess risk and return.
? The primary focus of financial accounting is on the information needs of investors and
creditors.
? Financial statements convey financial information to external users.
The economic environment and financial reporting ? The capital markets provide a mechanism to help our economy allocate resources
efficiently.
? Three primary forms of business organization: sole proprietorship, the partnership,
and the corporation. (In terms of the ownership of productive resources)
? Investors - provides resources (cash) in exchange for evidence of ownership interest.
Shares of stock
? Creditors – lend the cash, can through the medium of bonds.
? Stocks and bonds usually are traded on organized security markets such as the New
York Exchange and the NASDAQ.
? Secondary market transactions provide for the transfer of stocks and bonds among
individuals and institutions.
? Corporations receive no new cash from secondary market transactions. ? New cash is provided in primary market transactions in which the shares or bonds
are sold by the corporation to the initial owners.
? Secondary market transactions are extremely important to the efficient allocation of
resources in our economy. These transactions help establish market prices for
additional shares and for bonds that corporations may wish to issue in the future to acquire additional capital.
The investment-credit decision – a cash flow perspective ? A rate of return
? ? ? ? ?
?
? ? ? ? ? ? ? ?
E.g. an investor provides a company with $10,000 cash (that is, purchases ownership shares) at the end of 2010, receives $400 in dividends for the company during 2011, and sells the ownership interest (shares) at the end of 2011.
The investment would have generated a rate of return of 10% for 2011
$400 dividends + $600 share price appreciation
= 10%
$10,000 initial investment
Investors and creditors both are interested in earning a fair return on the resources provided.
The expected rate of return and uncertainty, or risk; of that return are key variables in the investment decision.
A company will be able to provide a return to investors and creditors only if it can generate a profit from selling its products or services. (Cash receipts exceed the cash disbursements)
The objective of financial accounting is to provide investors and creditors with useful information for decision-making. Cash V Accrual Accounting Cash basis accounting
Net operating cash flow = cash receipts – cash disbursements (provide goods and services)
Over short period of time, operating cash flows may not be indicative of the company’s long-run cash-generating ability (it’s ability to generate positive net operating cash flows in the future) Accrual accounting
Revenue – periodic accomplishments
Expense – periodic measure of resource sacrifices Net income/loss – revenue – expense
Net income is considered a better indicator of future operating cash flows than is current net operating cash flow
The development of financial accounting and reporting standards GAAP – general accepted accounting principles
SEC – The Securities and Exchange Commission was created by congress with the 1934 securities exchange Act.
The SEC has the authority to set accounting standards for companies, but has delegated the task to the private sector.
The accounting principles board (APB) followed the CAP.
The FASB (Financial accounting standards board) currently sets accounting standards. The (EITF) emerging issues task force identifies financial reporting issues and attempts to resolve them without involving the FASB.
In addition to issuing specific accounting standards, the FASV has formulated a
conceptual framework to provide an underlying theoretical and conceptual structure for accounting standards.
The FASB accounting standards codification is now the only source of authoritative U.S. GAAP. Exceptions are rules and interpretive releases of the SEC, which remain as sources of authoritative GAAP.
The establishment of accounting standards – a political process ? The FASB must consider potential economic consequences of a change in an
accounting standard or the introduction of a new standard.
? Public pressure sometimes prevails over conceptual merit in the standard-setting
arena.
? The FASB undertakes a series of information gathering steps before issuing an
accounting standards update. Our global marketplace ? Many U.S. and foreign companies operate and raise capital in more than one country. ? The international accounting standards board (IASB) is dedicated to developing a
single set of global accounting standards.
? International financial reporting standards are gaining support around the globe. ? The commitment to narrowing differences between U.S. GAAP and international
standards has influenced many FASB standards.
? The SEC roadmap proposed that IFRS be required by U.S. companies in 2014.
The role of the auditor ? Auditors express an opinion on the compliance of financial statements with GAAP. ? Auditors offer credibility to financial statements.
? Certified public accountants (CPAs) are licensed by states to provide audit services.
Financial reporting reform ? Complying with section 404 of SOX costs companies millions of dollars annually.
A move away from rules-based standards? ? A principles-based, or objectives-oriented, approach to standard setting stresses
professional judgment, as opposed to following a list of rules. Ethics in accounting ? Ethics deals with the ability to distinguish right from wrong. PART B THE CONCEPTUAL FRAMEWORK ? The conceptual framework does not prescribe GAAP. It provides an underlying
foundation for accounting standards.
? Objective of financial reporting is to provide useful information to capital providers.
Qualitative characteristics of financial reporting information ? To be useful, information must make a difference in the decision process.
? Fundamental qualitative characteristics: relevance and faithful representation
Relevance – the information must possess predictive value and/or confirmatory value, typically both.
Faithful representation – agreement between a measure and a real-world phenomenon that the measure is supposed to represent.
? To be useful for decision-making, information should possess the qualities of
relevance and faithful representation.
? Enhancing qualitative characteristics: comparability, verifiability, timeliness,
and understandability.
? Accounting information should be comparable across different companies and over
different time periods.
? Information is timely if it is available to users before a decision is made.
Practical boundaries (constraints) to achieving desired qualitative characteristics ? Cost effectiveness – the cost of providing financial information include any possible
adverse economic consequences of accounting standards.
